FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management
A manager has an annual return of 12% and tracking error of 4% against a benchmark returning 9%. The risk-free rate is 2%, the manager's volatility is 15%, and beta is 1.1. Which statement is correct?
The information ratio is 0.75 and the Sharpe ratio is 0.67. Active return of 3% over tracking error of 4% gives 0.75, while excess return over the risk-free rate of 10% divided by 15% volatility gives 0.67.
- AThe information ratio is 0.75 and the Sharpe ratio is 0.67Correct
- BThe information ratio is 0.75 and the Sharpe ratio is 0.80
- CThe information ratio is 2.50 and the Sharpe ratio is 0.67
- DThe information ratio is 0.25 and the Sharpe ratio is 0.80
Explanation
Information ratio = (12% - 9%) / 4% = 0.75. Sharpe = (12% - 2%) / 15% = 0.667. The 0.80 Sharpe divides by 12.5 and is not valid; 2.50 uses the wrong excess return of 10% over tracking error; 0.25 inverts values.
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